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Colon Health Centers of America v. Hazel, No. 12-2272

Decided: October 23, 2013

The Fourth Circuit Court of Appeals reversed and remanded the district court’s dismissal of plaintiffs’ Commerce Clause claim against the state of Virginia, for hindering the plaintiffs from opening facilities in the state through a certificate-of-need requirement. However, the Fourth Circuit affirmed the district court’s dismissal of plaintiffs’ Fourteenth Amendment claims.

Virginia requires medical providers to obtain a “certificate of public need” in order to launch a medical enterprise in the state. Applicants must demonstrate to the State Health Commissioner that a sufficient public need exists for the proposed medical services. The certificate application process is potentially lengthy, costly, and unpredictable. Plaintiffs, Colon Health Centers and Progressive Radiology, are medical providers who sought to avoid the burdens of this process. Colon Health combines the advantages of the two prevailing colon-cancer screening methods in a “one-stop shop” that screens, diagnoses, and treats colon cancer, all in one visit. Progressive Radiology specializes in using magnetic resonance imaging to diagnose neurological and orthopedic injuries.

On appeal, the plaintiffs challenged the certificate program as a violation of the dormant Commerce Clause and the Fourteenth Amendment’s Equal Protection, Due Process, and Privileges or Immunities Clauses.

With respect to the dormant commerce clause argument, the Fourth Circuit held that the district court erred in dismissing plaintiffs’ claim. The Court remanded for a factual investigation by the lower court as to whether the certificate program has a discriminatory effect on interstate commerce. In order to prove discriminatory effect, plaintiffs must demonstrate that the challenged statute would negatively impact interstate commerce to a greater degree than intrastate commerce. State laws that discriminate against interstate commerce can be per se invalid in three ways: facially, in practical effect, or in purpose. Under strict scrutiny analysis, a court must invalidate the challenged law unless the state demonstrates that it serves a legitimate purpose, which could not be better served by available nondiscriminatory means. In this case, plaintiffs alleged discrimination in both purpose and effect. Because the purpose of Virginia’s certificate program is to protect current healthcare providers from competition, the plaintiffs alleged the purpose is to protect in-state entities at the expense of out-of-state entrants. Because the certificate application process requires a lengthy fact-finding process, the plaintiffs alleged it grants in-state economic interests the power to obstruct the market entrance of new-, primarily out-of-state competitors. The Fourth Circuit held that determining whether Virginia’s certificate-of-need law discriminates, in either purpose or effect, necessarily requires looking behind the statutory text to the actual operation of the law, i.e. by proper fact-finding. In any event, plaintiffs’ claims of discrimination are sufficient to raise their right to relief above the speculative level and, therefore, satisfy the standard for surviving a motion to dismiss.

Moreover, even if the Virginia law discriminates neither in purpose nor in effect, it may still be unconstitutional under Pike v. Bruce Church, Inc., if it places an “undue burden” on interstate commerce in relation to the putative local benefits, under a rational basis test. The plaintiffs argued that Virginia’s certificate requirement does not actually achieve any legitimate local benefits. Because the challenge presented issues of fact that cannot be properly resolved on a motion to dismiss, the Fourth Circuit held that the district court erred in dismissing appellant’s Pike claim. However, The Fourth Circuit directed the lower court on remand to focus primarily on the discriminatory effects test, rather than the Pike test, which fails to properly cabin the judicial inquiry or effectively prevent the district court from assuming a super-legislative role. Under the discriminatory effects test, the proceedings must investigate the differential burdens imposed on out-of-state and in-state firms subject to the certificate-of-need process.

Regarding the plaintiffs Fourteenth Amendment claims, the affirmed the district court’s dismissal. First, plaintiffs’ alleged a violation of the Equal Protection clause, which centered on the state’s treatment of nuclear cardiac imaging, which is exempted from the certificate-of-need requirement, although similarly situated to other types of medical imaging. However, non-suspect classifications are accorded a strong presumption of validity. The Fourth Circuit held that Virginia articulated sufficient justifications for the nuclear cardiac imaging exemption to survive rational basis scrutiny. Next, plaintiffs alleged a violation of the Due Process clause, contending that the certificate program irrationally burdened their right to earn a living and failed to advance any state purpose other than bald economic protectionism. Because the program does not infringe on a fundamental right, it is subject to rational basis scrutiny, which is quite deferential. In addition, the Fourth Circuit held the certificate program served a variety of legitimate purpose. Finally, plaintiffs alleged a violation of the Privileges or Immunities Clause, contending that the certificate program contravenes the “right to earn an honest living” embodied in the clause, which provides that “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States.” However, the plaintiffs conceded that the Supreme Court’s decision in Slaughter-House Cases confined the reach of this clause to a set of national rights that does not include the right to pursue a particular occupation.

Full Opinion

– Sarah Bishop